Currently, the state workforce consists of approximately 363,000 personnel years (PYs). (A PY is roughly equivalent to one full–time equivalent employee.) Total state payroll, including university personnel, is now roughly $24 billion per year. Of the 363,000 PYs, just over one–third are employed by the state’s two public university systems. Excluding university employees, around $11 billion of General Fund expenditures—about 11 percent of the budget in the 2008–09 Budget Act—relate to state personnel costs, including payroll and state contributions to employee pensions, health, and other benefits.

Overview: Governor Proposes Substantial Cuts in State Personnel Costs

Various Measures to Reduce Employee Costs—With Almost No Raises—Under Governor’s Plan. Under the Governor’s budget, very few state employees—specifically, California Highway Patrol (CHP) officers and almost no others—would receive a general salary increase in 2009–10. The Governor also proposes major decreases in state personnel spending to help balance the budget. Specifically, the Governor proposes that the Legislature approve:

A two–day–per–month furlough of nearly all state workers (principally, excluding CHP officers) and an accompanying 9.2 percent reduction in their monthly pay beginning in February 2008 and ending in June 2010. (While the Governor is attempting to implement the furlough and other changes through an executive order—now subject to legal challenges—the administration also has requested statutory authority to implement the furlough and other measures outside of the collective bargaining process. In this piece, we mainly consider the statutory proposal.)

Elimination of two state holidays and an existing policy to pay most employees more when they work on other holidays.

A statutory requirement to require that overtime payments be made to state workers based on actual time worked rather than on other calculations that have been used for some groups of employees.

A measure authorizing the administration to negotiate directly with health plans and providers for health coverage for state workers and retirees. The measure would remove this authority from the California Public Employees’ Retirement System (CalPERS) beginning in January 2010.

In addition to the proposed legislative actions, the administration also has initiated steps to lay off up to 10 percent of state employees paid from the General Fund. (The administration has existing statutory authority to initiate layoffs.) The budget proposal reflects $150 million of General Fund cost savings from these layoffs in 2009–10. Its savings estimate corresponds to only about 1.5 percent of General Fund employees.

All but One of the State’s Collective Bargaining Agreements Have Expired. While 20 of the state’s 21 bargaining unit agreements have expired—with the one exception being the CHP officers’ agreement, which expires in July 2010—the law generally provides that provisions of prior agreements, or memoranda of understanding (MOUs), continue in effect (at least until the state and the union reach an impasse in negotiations). Accordingly, certain provisions of expired agreements—mainly, those providing for increased state contributions to employee health benefits—continue to generate higher state costs.

In Total, a Proposed 11 Percent Drop in General Fund Personnel Costs in 2009–10. Figure 1 shows the net General Fund savings of the various Governor’s employee compensation proposals. The Governor’s proposal (through Item 9800 of the budget) would provide $122 million ($45 million General Fund) to cover estimated departmental cost increases under provisions of various collective bargaining requirements in 2009–10. Increased health, dental, and vision contributions under expired MOUs—assuming a typical rate of annual growth in CalPERS plan premiums for 2010—account for over 60 percent of the proposed General Fund costs in Item 9800.

a Does not reflect other reductions in personnel costs included in departmental budgets as policy proposals—for example, proposed changes in prison and parole policies.

CalPERs = California Public Employees’ Retirement System.

In addition, the Governor has submitted trailer bill language to implement his employee compensation savings proposals, including several proposals that would enact changes notwithstanding existing statutory requirements that they be negotiated with unions through collective bargaining. The administration also proposes that the Legislature include Control Section 3.90 in the 2009–10 Budget Act, which would give the administration the authority to capture the proposed savings outlined in Figure 1 from departmental employee compensation budgets after passage of the 2009–10 budget package. In total, the proposals would result in a net reduction of state personnel costs by $1.9 billion ($1.2 billion General Fund) in 2009–10, compared to the administration’s workload budget. In addition to these cost reductions, implementation of the administration’s proposals beginning in February 2009 would reduce 2008–09 personnel costs by $698 million ($415 million General Fund)—principally as a result of savings from the furlough proposal. General Fund personnel costs would be reduced by about 11 percent in 2009–10 under the administration’s proposal.

Cuts of a Similar Magnitude in Special Funds Personnel Costs. Most special funds also would see personnel cost reductions approaching 10 percent over the same time period. While most special funds do not face a deficit like that of the General Fund, it is necessary to implement pay reductions or furloughs across all funds in order to prevent employee migration from one state department to another.

Employee Compensation Cuts Necessary, but Administration Plans Will Be Difficult to Achieve

A Budget Deficit So Large Requires Cuts in the Personnel Budget. With a budget gap as large as the one now facing the state, it is almost impossible to imagine a budget solution that does not involve some level of reductions in state employee costs. As described above, state employee costs equal around 11 percent of the existing General Fund budget, making this too large an expenditure category to ignore when fashioning a solution to this year’s monumental deficit. We conclude that the administration’s targeted General Fund personnel cost reductions of $415 million in 2008–09 and $1.2 billion in 2009–10 represent a reasonable attempt to generate savings in this expenditure category.

More Detail Needed on Furlough to Ensure Real Cost Savings Are Possible. While we acknowledge the need for difficult measures to reduce General Fund employee costs over the next 17 months, the administration’s proposals still lack many important details. For many departments, closing offices on the first and third Fridays of each month—as the Governor has directed in connection with his furlough executive order—could work as a cost–saving measure. These reduced employee hours would result in diminished services received by the public. For 24–hour institutions such as state hospitals and prisons, however, the administration apparently intends to give workers two more days a month of leave time. It is assumed that the leave would be accumulated by workers and used as a substitute for paid vacation time. In other words, the assumption is that workers at these institutions will take as many days off as they otherwise would—just that 34 of those days (two days per month times 17 months) will be furlough days and not paid vacation days. If, on the other hand, employees at 24–hour institutions take the time off they ordinarily would for paid vacation and, in addition, take their furlough days off, this would mean that other workers would have to work for more hours—often earning overtime—to cover for the employee’s extra leave time. While departmental budgets include a baseline amount to cover expected overtime costs, institutional budgets do not include funds to cover extra overtime costs in this particular scenario. Alternatively, state hospitals, prisons, and other institutional facilities could alter shifts and scheduling arrangements to account for the possibility that average daily staffing levels would be reduced because of the furloughs. This option, however, could affect health and safety at these institutions and run afoul of court or consent–decree requirements for staffing.

Recommend Asking Administration to Expand on Furlough Proposal. Because of the issues described above, we recommend that the administration be asked to describe their exact plans in each 24–hour department to ensure that furloughs would result in real cost savings—rather than increased overtime costs that would offset the budgeted savings or potential compromises of employee, inmate, or resident health and safety.

Collective Bargaining Is Largely a Process of Quid Pro Quo. Rank–and–file state employees do not have a constitutional right to bargain collectively through their unions concerning terms and conditions of employment. The Legislature, instead, established collective bargaining in a 1977 statute known as the Ralph C. Dills Act. The Dills Act established requirements that the administration—through the Department of Personnel Administration (DPA)—meet and confer in good faith with unions chosen by employee bargaining units to represent them. The unions also must meet and confer in good faith. Through negotiation, the parties reach agreement on MOUs that spell out key terms of employment, including salary increases and benefits. Those agreements also must be approved by members of the bargaining unit itself, and key provisions—especially those requiring the expenditure of funds—must be approved by the Legislature in order to take effect. Nearly three decades of state operations under the Dills Act have shown that the employee collective bargaining process is one of give and take, where concessions from one side at the bargaining table must be matched with benefits offered from the other party. Collective bargaining inevitably involves a quid pro quo between employer and union—one thing in exchange for another.

Right Now, the State Has Little or Nothing to Give Employees in Exchange for Large Cuts. The administration has proposed that its employee compensation package, including the furloughs, be authorized by the Legislature outside of the collective bargaining process. Because the Legislature created the state employee bargaining process through statute, it also can change the process through statute. For example, the administration proposes that its furlough proposal for rank–and–file employees be authorized in statute “notwithstanding the Ralph C. Dills Act . . . or any other provision of law.” Furthermore, through Control Section 3.90, the administration proposes that the Legislature give the administration authority to reduce departmental appropriations to reflect these proposals—thereby reducing appropriations for parts of existing or prior MOUs that conflict with the furlough, holiday, and premium pay proposals. The Dills Act requires the Legislature to provide appropriations for any provision of an MOU requiring the expenditure of funds. Since passage of the Dills Act, however, there is little or no precedent for the Legislature approving such large reductions in appropriations for state employee costs outside of collective bargaining. Therefore, the administration’s proposals represent a sharp change from past state policy. Given the circumstances, however, we believe that the proposal is appropriate because the state has little of value that it could give unionized employees in exchange for such large cuts. Accordingly, it would be virtually impossible to achieve agreements with unions in the timeframe necessary to achieve the budgeted savings (as well as quick reductions in state spending to help the state’s cash flow situation). Moreover, even if the state and unions reached such agreements, they could probably do so only with promises that the employees receive something valuable—pay raises, benefit increases, or other changes likely to increase state costs—within a few years. The state’s current and structural budget deficits are so massive that we must advise the Legislature to reject bargaining agreements that secure cost savings now in exchange for substantial cost increases later. The administration, we believe, is correct to propose one–time exceptions from the Dills Act process to implement these emergency budget measures.

Layoffs Are a Blunt Tool and Should Be a Relatively Minor Part of the Budget Solution

Administration Assumes Relatively Little Savings From Statewide Layoffs. State law gives the administration broad power to lay off state workers for lack of work or lack of funds, provided that a lengthy statutory process is followed to ensure that more junior workers are the ones most likely to be affected by the layoffs. On December 19, 2008, the Governor ordered DPA to work with departments to begin the process “to initiate layoffs and other position reduction and program efficiency measures to achieve a reduction in General Fund payroll of up to 10 percent.” The order also directed departments to deliver “surplus” notices to General Fund employees in the bottom 20 percent of seniority, which is a necessary precursor to laying off some of these workers. Despite these directives, the Governor’s 2009–10 budget plan assumes relatively modest General Fund savings from layoffs—just $150 million, which equates to only about 1.5 percent of General Fund personnel costs.

Targeted Layoffs Set by the Legislature Are Preferable to Broad–Based Layoffs From the Administration. While the administration’s other proposed employee compensation savings measures are painful and difficult for state employees and their families, we agree with the administration’s effort to prioritize other savings initiatives over broader, statewide layoffs. Pay cuts could hurt recruitment and retention of employees, but broad–based layoffs could seriously reduce employee staffing in departments. Because such layoffs might be administered by the executive branch alone, the departments most affected might run counter to the Legislature’s priorities concerning programs and services. Should the Legislature wish to pursue greater cost savings through layoffs, we advise picking particular programs that are deemed to be lower priority and reducing expenditures in those particular programs. Layoffs resulting from that kind of targeted legislative action would best reflect the Legislature’s priorities.

Governor Proposes That Employee and Retiree Health Plans Be Managed Within the Administration. The Legislature determines policies concerning state employee and retiree health benefit programs. Currently, through the Public Employees’ Medical and Hospital Care Act (PEMHCA), the Legislature vests responsibility for managing PEMHCA health care programs for state workers, state retirees, and employees or retirees of participating local agencies with CalPERS. The Governor’s budget plan includes trailer bill language that would amend PEMHCA to allow—in addition to CalPERS—“another authorized entity of the state” (presumably DPA) to offer such plans. Further, the budget plan assumes that, effective January 1, 2010, the state—by moving health plan negotiations from CalPERS to DPA—would be able to achieve a 10 percent reduction in the share of health premiums that the state pays for its employees and retirees. These savings would total $180 million ($132 million General Fund) in 2009–10, the administration estimates, and would be applied to addressing the 2009–10 budget problem. In the 2009–10 Governor’s Budget Summary, the administration indicated its intent that, beginning in 2010–11, such savings be applied to addressing the state’s unfunded retiree health liabilities—which were estimated to be $48 billion in 2007.

Moving Health Plan Administration to Within the Administration Is Worth Considering. Our office proposed moving health plan administration from CalPERS to DPA in 1985. At the time, we noted that DPA administered virtually all of the state’s employee benefit programs, which is still true. In our Analysis of the 1985–86 Budget Bill, we wrote that “we can find no convincing reason why the CalPERS board, an independent entity having no overall responsibility for the negotiation and administration of state employee benefits, should be in charge of this one major benefit.” Furthermore, having an independent entity manage health plans means that the state department in charge of coordinating personnel policy has only a token say (the DPA director sits on the CalPERS board) in how these plans structure and offer benefits. In effect, by delegating such vast power to the independent CalPERS board, the Legislature has diminished substantially its ability, through DPA, to direct state personnel health policies and costs. We continue to believe that exploring a move of health benefit programs from CalPERS to DPA makes sense.

Nevertheless, Achieving Large Changes and Cost Savings by January 2010 Is Unlikely. While we are supportive of the administration’s general approach, we are skeptical that a transition of the administration of health plans involving hundreds of thousands of state employees and, perhaps, local employees enrolled in PEMHCA can be achieved within a one–year timeframe. Moreover, the administration assumes huge cost savings that would, by necessity, involve large “cost–shifting” (through increased copayments, deductibles, or similar changes) from the state to employees and retirees. The Governor’s proposal offers no meaningful detail on what changes would be implemented in health plans to achieve these considerable savings by January 2010.

Major Changes Proposed for State Retiree Health Vesting for Future Hires

Most State Workers Now Vest in These Benefits Within 20 Years. In our February 2006 publication, Retiree Health Care: A Growing Cost for Government, we described the comprehensive retiree health benefits that the state provides to its workers as deferred employee compensation for their years of service. In our report (see page 4), we noted that state employees hired prior to 1985 generally are fully vested for health benefits upon their retirement after a career of service with the state. Most state employees hired since 1985 receive no state contributions for retiree health benefits until they reach ten or more years of service. These workers receive 50 percent of the maximum state contribution with ten years of service, increasing 5 percent annually until they are eligible to receive 100 percent of the maximum state contribution after 20 or more years of employment.

Governor Proposes Lengthening Retiree Health Vesting Period to 25 Years. Trailer bill language accompanying the Governor’s budget plan proposes to lengthen the retiree health vesting period for state, CSU, and judicial employees hired beginning on July 1, 2009, to 25 years. The proposed statute would provide that these future hires “may not receive any portion of the employer contribution” for retiree health care “unless he or she is credited with 25 years of state service at the time of retirement.” This would be a significant change in retiree health benefits accrued by new hires. Currently, Item 9650—which pays for the state’s contributions to CalPERS to cover the cost of retiree health benefits—is one of the fastest–growing budget items, and the state’s unfunded accrued liability for these benefits was estimated at $48 billion in 2007. While the proposed change would result in no cost savings for the state for the foreseeable future, it could reduce Item 9650 costs substantially over the long term.

Other Options for the Legislature to Change Retiree Health Vesting. We believe that the administration’s proposed changes to vesting have merit. Requiring future hires to work for an entire 25–year period before receiving any state contributions for retiree health benefits, however, is a fairly significant change. More modest changes could be enacted as an alternative: for example, allowing workers to receive a reduced benefit after 15 or 20 years of service, with that benefit increasing each subsequent year until the full state contribution is provided after 25 years of service.